Hanesbrands Inc. (HBI) Q2 2023 Earnings Call Transcript

Hanesbrands Inc. (NYSE: HBI) Q2 2023 earnings call dated Aug. 11, 2022

Corporate Participants:

T.C. Robillard — VP Investor Relations

Stephen B. Bratspies — Chief Executive Officer, Director

Michael P. Dastugue — Chief Financial Officer

Analysts:

Michael Binetti — Credit Suisse — Analyst

Susan Anderson — B. Riley FBR — Analyst

William Gardner — Wells Fargo — Analyst

James Duffy — Stifel Nicolaus — Analyst

Jay Sole — UBS — Analyst

Paul Kearney — Barclays Capital — Analyst

Tom Nikic — Wedbush Securities — Analyst

Presentation:

Operator

The conference will begin shortly. To raise your hand during Q&A, [Operator Instructions]. Good day and thank you for standing by. Welcome to the Second Quarter 2022 Hanesbrands’ Earnings Conference Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, TC Robillard -VP of Investor Relations. Please go ahead.

T.C. Robillard — VP Investor Relations

Good day everyone and welcome to the Hanesbrands Quarterly Investor Conference Call and Webcast. We are pleased to be here today to provide an update on our progress after the second quarter of 2022. Hopefully everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and the replay of this call can be found in the Investors section of our hanes.com website. On the call today, we may make forward-looking statements either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks include those related to the impact of the COVID 19 pandemic and measures taken by governmental or regulatory authorities to combat the pandemic, as well as current macroeconomic conditions, consumer demand, inflationary environment and cyber security, including risks regarding the ransomware attack announced on May 31. These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Unless otherwise noted, today’s references to our consolidated financial results and guidance exclude all restructuring and other action-related charges and speak to continuing operations. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today’s news release. With me on the call today are Steve Bratspies, our Chief Executive Officer and Michael Dastugue, our Chief Financial Officer. For todays call, Steve and Michael will provide some brief remarks and then we’ll open it up to your questions. I will now turn the call over to Steve.

Stephen B. Bratspies — Chief Executive Officer, Director

Thank you. T.C. Good morning everyone and welcome. Despite Q2 being a disappointing quarter, I want to thank our committed Hanesbrands associates around the world for everything they’re achieving in this difficult operating environment. We continue to work toward and make progress against transforming Hanesbrands into a consumer-centric growth company. For todays call, I’d like to touch briefly on the quarter, including the unexpected cyber event and external factors that negatively impacted our performance. Next, I’ll discuss our outlook for the rest of the year before providing an update on our full potential growth strategy. Then I’ll turn the call over to Michael to provide greater detail. As you’ve heard through this earnings season, the global operating environment deteriorated in the second quarter. Inflation continue to impact product costs and increasingly weighed on consumer demand. COVID remains a headwind in parts of Asia and inventory has built up in pockets at retail. All of which drove, softer than expected, point of sale trends in the quarter

Adding to these macro headwinds, was the unexpected impact from the previously disclosed cyber event, which disrupted our global operations in late May. As a result, our second quarter performance was below our expectations. While profit margins were in line with our forecast, sales and profits were below our guidance and we ended the quarter with more inventory than planned, which is creating a near-term drag on cash flow. That said, our team did a great job recovering from the Cyber event, which temporarily shut down parts of our global supply chain network and limited our ability to fulfill customer orders for nearly three weeks. And despite the disruption, we shipped all over innerwear back-to-school commitment on time and in full. Absence of cyber event we estimate, second quarter sales would have still been below our guidance. However, operating profit and earnings per share would have been at the high end of our guidance range. To be clear, we’re not satisfied with our performance in the quarter. That said, as an organization, we’re not standing still. We remain nimble, we’re continuing to execute our long-term growth strategy and we’re staying focused on controlling the things that we can control. Today we have plans in place to bring our inventory levels down. We’re confident in the quality of our inventory given the vast majority’s replenishment innerwear products and we expect to end the year with inventory units below prior year. We continue to invest in our brands globally as well as our technology and our count. We have a solid track record of managing SG&A and will remain disciplined in managing expenses without sacrificing investments in our full potential plan and we’ll continue to search for additional cost savings opportunities.

Looking at the back half of the year, we reduced our sales and profit outlook to reflect the changes in FX rates, the short-term costs associated with our inventory reduction actions, as well as an assumptions that slow consumer demand continues and the retail environment remains challenging. While estimated reduction may prove to be conservative, we felt it was prudent given a softer than expected point of sales trends in the second quarter and the overall macro environment. That said, we’re convinced we have the right long-term strategy. We’re hearing it from our consumers, our suppliers and our retail partners and we remain steadfast in executing our full potential plan. We’re acting more like a global operating company, We’re beginning to move with speed and we’re seeing evidence of this around the globe in our innerwear, champion and supply chain initiatives.

Touching on each of these, unlike how we’ve consolidated design globally in innerwear, we’re starting to see results with new innerwear products and innovation and we’re driving retail space gains. I’m very pleased with how our total support pouch, X-Temp is performing, both in the US and Australia. This is the first time we’ve launched innovation globally and supported it with a global marketing campaign. Our Retro Rib products from Australia was launched in the United States under the Hanesbrands and is exceeding our expectations. Our top customers are very pleased with the consumer response and we expect to gain additional retail space. We’re also building innovation platforms around absorbency. We believe this is a meaningful opportunity under our Hanes and Bonds brands with lots of different usage occasions ranging from adult and child absorbency, post pregnancy needs for women and this is just the start. Our product and innovation pipeline is full. We’ve a lot of big ideas across our basics and intimates brands that we expect to drive continued retail space gains. I look forward to sharing more of our innovation pipelines towards the end of this year and into 2023.

Turning to our Champion business, we continue to invest in the brand globally. As we highlighted at our Investor Day last year, Champion is a big part of our full potential plan. We see significant growth opportunities through the expansion of our women’s and kids’ businesses, the expansion in new markets such as China, as well as into adjacent product categories, including footwear. Specifically footwear in North America, represents an expanded opportunity. We purchased the Champion trademark for footwear in North America in the quarter. This purchase adds the control we have over the Champion brand and product globally. It will give us greater speed to market and the ability to have a more integrated and collaborative approach with our apparel offerings. I saw this opportunity first hand in May, as I traveled and spent time with the Champion Europe team. They have amazing head to toe product that comes to life in a great retail shopping experience. I came away from the trip excited about our European operations and I saw a significant opportunity to leverage our global capabilities for the Champion brand. We can build in our footwear success in Europe and Asia to address the US market and more broadly, we have a big opportunity to coordinate design, product development and merchandising globally. During the quarter, we also continue to invest in our Champion distribution network, as we consolidate down to two wholesale Champion DCs. This will simplify our distribution model, create efficiencies, lower costs and improve retail service, as well as support the future growth of Champion in the US.

And lastly, we’re in the early stages of executing our full potential supply chain strategies to build on our advantaged position as well as balance speed, cost, and flexibility to enable faster top line growth and higher margins over time. These efforts involve segmenting our supply chain and the previously mentioned DC consolidation work we’re doing in Champion. In addition, we also began direct shipping innerwear product from our Central American manufacturing facilities to certain wholesale customers in the US. This initiative leverages our scale, saves time, and reduces cost for both us and our retail partners. We’re also on track to go live this month with our New West Coast DC to support our direct to consumer business. Plus, we began adding additional automation to several DCs. This includes the addition of robotic sortation systems, which will help improve picking and sorting speeds, while also lowering costs. So in closing, the macro environment remains extremely challenging and is weighing on near term results, but our team is focused and we’re not standing still. We’re executing our full potential growth strategy of consumer centricity, simplification, increased speed and building digital capabilities. We’re controlling the things we can control and we’re delivering innovation. We have the biggest and most robust pipeline of new products and innovation in decades. These products are rolling out, they are testing well our consumers and retailers. They’re driving retail space gains and there’s a lot more coming as we head into next year. As we look forward we’re convinced, our strategy positions us to deliver revenue and profit growth with consistent cash flow over the next several years. And with that, I’ll turn the call over to Michael.

Michael P. Dastugue — Chief Financial Officer

Thanks, Steve. As previously mentioned, we faced an unexpected cyber event and external factors that impacted our second quarter performance and while we’re not at all satisfied with our results, the near term headwinds we’re facing do not change our long-term strategy or the work we are doing to transform Hanesbrands into a consumer-centric growth company. I’m encouraged by the progress we’ve made in implementing our full potential plan. In the quarter, we continue to increase investments behind our brands globally. We’re rolling out new product innovation across men’s and women’s, with a robust pipeline that extends beyond 2023. We’re effectively managing SG&A costs and finding cost savings opportunities. We’re continuing to find ways to leverage our global capabilities, which improves speed to market and lowers cost. The macro related factors impacting near-term performance, should settle out over time. That said, our focus remains on controlling the things we can control and executing our long-term strategy. By leaning in to our growth related investments during challenging times, we believe, we will be even better positioned to gain market share and deliver sales and profit growth over the next several years.

For today’s call, I’ll touch on the highlights from the quarter as well as provide some thoughts on our outlook for the remainder of the year. For additional details on the quarter’s results and our guidance, I’ll point you to our news release and FAQ document. Overall, our second quarter results were below our expectations. This was driven by a combination of unexpected Cyber Event in late May and softer point-of-sale trends relative to our forecast. In total, we estimate the Cyber event negatively impacted the second quarter by approximately $100 million in sales, $35 million in operating profit and $0.08 in EPS. Absence of this Cyber Event, we estimate sales for the quarter would still has been below our forecast. However, adjusted operating profit and EPS would have both been at the high end of our guidance range. Looking at the specifics in the quarter, net sales were $1.51 billion, a decrease of 14% as compared to last year. Adjusting for the 220 basis point headwind from foreign exchange rates, constant currency sales decreased 11% from the prior year. Although the macro headwinds are weighing on our near-term performance, sales were up 75% on a two-year stack basis excluding PPE and year-to-date sales are 8% higher than pre-pandemic levels with growth across all businesses. For the domestic businesses in the first half of the quarter, sales were pressured by point-of-sales trends and product availability challenges. Unfortunately, this was magnified in late May due to the cyber event. It impacted our ability to receive and ship products, while at the same time we saw consumer demand slow as a result of the highest inflation in decades. We saw these trends across– across both our Innerwear and Activewear businesses.

Overall, our international businesses performed relatively better in the quarter despite the Cyber Event. Constant currency sales declined approximately 3% as compared to prior year; although performance varied by region. Sales in Australia and Europe declined in low-single digits, in Latin America sales were up as we overlap COVID related headwinds in the year ago quarter and in Asia, sales were essentially flat with prior year as the intermittent COVID headwinds in China were offset by growth in the rest of the region.

And now turning to margins, adjusted gross margin declined 120 basis points over prior year to 37.8% driven by lower sales volume, input cost inflation, the incremental cost associated with the Cyber event and exchange rates. These headwinds, more than offset the benefits from business mix. The first quarter price increase in innerwear, cost savings and less air freight. With respect to SG&A on a percent of sales basis, our adjusted SG&A expense increased 215 basis points over prior year to 27.7%. The increase was driven by the deleverage of lower sales volume, as well as planned increased investments in brand marketing and technology. These more than offset cost controls and expense efficiencies from our Full Potential initiatives. This resulted in adjusted operating margin of 10.2% for the quarter. Our operating margin was in line with our forecast as the organization did a great job of managing expenses in response to the challenges we face while maintaining brand related investments.

Turning to cash flow and the balance sheet, we ended the quarter with nearly $1 billion of total liquidity, which included approximately $250 million in cash. Cash flow from operations was a use of approximately $210 million in the quarter, driven primarily by working capital used for inventory. Inventory at the end of the second quarter was up 19% over prior year in unit. On a dollar basis, inventory was up 37% due predominantly to inflation, lower second quarter sales and the early arrival of products in the third quarter commitments. Inflation alone represented roughly half of the year-over-year increase. We’re confident in the quality of the inventory, as approximately 80% of the year-over-year increase is in replenishment innerwear products. That said. we did end the quarter with more inventory on hand than planned. We already have a number of initiatives underway to reduce our inventory and we expect by year-end that our inventory units will be below last year’s level.

The reduction plans we have in place include temporarily reducing production shifts in our manufacturing facilities as well as strategic actions tied to our segmented supply chain initiative. On top of those, is our ongoing initiative to reduce SKUs. We have plans to further reduce SKUs by another 30% with some of the benefit coming this year. The impact from these actions is reflected in our updated financial guidance.

And now turning to guidance. Looking at the second half of the year, we reduced our sales and profit outlook to reflect the changes in FX rates, the short-term cost associated with our inventory reduction actions, as well as an assumption that slow consumer demand continues and the retail environment remains challenging. With respect to sales, although we expect the second half to be down low to mid single digits as compared to the prior year, sales are still expected to be well above pre-pandemic levels. We are continuing to invest in our brands and we are seeing good consumer engagement and we’re launching new product innovation. Touching on the quarters, we expect better year-over-year sales performance in the third quarter as compared to the fourth quarter. This outlook is driven by initial back-to-school commitments and the shipments of our initial Champion fall-winter product sets.

Turning to margins, at the midpoint, we expect gross margin in the second half to decline approximately 350 to 400 basis points over prior year with our larger year-over-year impact in the third quarter as compared to the fourth. This is driven by three main factors. First, the impact from inflation. As higher input costs work their way up the balance sheet and on to our P&L. This is unchanged from our prior outlook. Second, the deleverage impact related to lower sales and third, incremental costs related to our actions to reduce inventory by year-end. Looking at our outlook from us for operating margins at the midpoint, we expect second half operating margins to be down slightly more than 400 basis points as compared to last year. The incremental pressure relative to our prior outlook is a function of the deleverage from lower gross profit dollars as we remain committed to investing in our brands and technology. We expect greater year-over-year impact in the third quarter as compared to the fourth and lastly, we expect to generate approximately $400 million in cash flow from operations in the second half, which is more than sufficient to support our full potential investments and our dividend. For the full year, we expect cash flow from operations to be essentially breakeven. The change relative to our prior outlook is due to lower profit outlook and the working capital impact from the higher than planned Inventory dollars. So in closing, I’ll echo Steve’s comments, the global operating environment remains challenging and it’s weighing on our near-term financial results but the organization is not standing still. Our team is focused, we are executing our full potential growth strategy. We’re controlling the things we can control and we’re delivering innovation with a robust pipeline that extends beyond 2023. As we look forward, we are convinced, our strategy positions us to deliver revenue and profit growth with consistent cash flow over the next several years, and with that I’ll turn the call over to T.C.

T.C. Robillard — VP Investor Relations

Thanks, Michael. That concludes our prepared remarks. We’ll now begin taking your questions and we’ll continue as time allows. I’ll turn the call back over to the operator to begin the question-and-answer session, Operator.

Questions and Answers:

Operator

As a reminder, [Operator Instructions]. Please standby while we compile the Q&A roster. Our first question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.

Michael Binetti — Credit Suisse — Analyst

Hey guys, thanks for all the detail here. I know it was a tough quarter to get through. I want to ask a little bit about about Champion. You had a very specific comment in there that you delivered all of your innerwear deliveries for back-to-school. Does that imply, can I assume that the Cyber event hit Champion more than the innerwear business? I guess I’m specifically looking at the Champion sales numbers you gave here. This is the first time we’ve seen the revenue dollars move below 2019 levels. Obviously you had a lot of things that were one-off going on in the quarter. I’m just, I’m trying to think about what happened, was there an outsized impact on Champion and maybe some thoughts and detail to help us get confidence in building back Champion to a growth brand here as we look ahead in the model?

Stephen B. Bratspies — Chief Executive Officer, Director

Sure. Good morning, Michael. Thanks for the question and thanks for joining us today. So let me get, parse that apart and Michael if I miss anything, you think kind of jump in.

Michael P. Dastugue — Chief Financial Officer

Yeah, sure.

Stephen B. Bratspies — Chief Executive Officer, Director

In terms of thinking about the Cyber incident that we had impacting Innerwear more than Activewear more than Champion, I would not really, I wouldn’t parse it apart that way. I think it was pretty much consistent across our business and how we, how we manage it and how it flows. When you think about Champion. Obviously, it’s a– it’s a commit business. So we brought in some of that inventory early into Q2, which is part of our current inventory issue from a quarter over quarter perspective right now. But we feel good about shipping that product kind of on-time that it rolls out into Q3. So, no-no more disruption on one side of the business than the other side of the business. When you think about Champion, yes, it was a tough quarter. You look back, we’re overlapping a huge quarter. So 96% two-year stack, which gives us some good feeling but a couple of things impacted that business. Let me walk you through of what we think impacted the business and then I’ll talk about kind of what we’re doing, where we’re going and why we’re very confident in the brand going forward.

At the beginning of the quarter, we continued to have some service challenges and some product, still some product delay, we’re working through that, then we definitely had a consumer slowdown in the middle of the quarter, which caused some of the excess retail and from the retailer channels backing up a little bit. We had the Cyber Event that we talked about and we are still experiencing some COVID headwinds in Asia, particularly in China, which is still working against us. So I feel, and I’m very confident that business is much stronger today than it was pre-pandemic. That said, we got work to do and let me talk to you a little bit about what we’re doing and where we’re going to take the brand over time because I think there’s a lot of good things happening and we’re very committed to Champion being a big part and is a big part of our Full Potential plan. So first of all, we’ve a new leadership team, and I’m really pleased with the team and it’s at the top level and it’s down through the business that I think is incredibly committed and it’s going to take the brand to the next level on a global basis. I’m very focused on a very defined segmentation strategy for product and channel and improving upon our executions against that going forward, which is an opportunity for us. The consumer continues to ask for the brand and they continue to ask for more and broader assortment for us. We need to deliver that. The pipeline is building of new product ideas and I feel better today than I did in the past about what’s to come as we go forward and we’re going to continue to expand into new business opportunities.

So we acquired the footwear trademark in the US for Champion in this quarter, which is an accretive opportunity to us and continue to build on our capability. We already have a very robust footwear business in Europe and in Asia. So we know how to do this and it’s going to be part of the globalization strategy of the brand. We’re going to continue to expand new geographies. I’ve said this before, you’ve heard me say, we’re very early in China right now. There is headwinds there right now with COVID, which – so we’re not moving as fast as we initially had planned, but that’s COVID related, nothing to do with the brand or operations behind it and we continue to have new or incremental consumer segments. We are under-developed with women and kids and we’re very focused on that. So, I look at the business and all the things that we’re working on haven’t changed because we had a rough quarter and we think there’s still a lot of demand for the brand and I’m encouraged about what the opportunity is for us going forward and it’s going to be a big part of our overall execution strategy and I think a ton of upside.

Michael Binetti — Credit Suisse — Analyst

Okay, thanks a lot guys. I appreciate it.

Operator

Our next question comes from the line of Susan Anderson with B Riley. Your line is now open.

Susan Anderson — B. Riley FBR — Analyst

Hi, can you give us an idea on how much the POS flowed into the second — in the second quarter and then also how it’s trending in third quarter? I guess, I’m curious if you’ve seen a pickup at all with back-to-school and then on-time deliveries and then also if you could maybe talk about product costs for the back half and into 2023, and if you’re seeing some easing there at all, as we head into 2023 and how we should think about cotton as well oil?

Stephen B. Bratspies — Chief Executive Officer, Director

Sure. Good morning, Susan, and thanks for joining us. Let me do the first one and then I’ll let Mike on part of our product cost. The consumer is certainly still feeling pressure, inflation is impacting consumer sentiment overall and demand, and we’re seeing that globally in our US business, Australia, Europe, and as I mentioned, we’re still seeing some COVID pressures in Asia and we hear this lots of talk about that the shift of discretionary budgets between experiences thing. So, we definitely saw the pressure build in May and June, and it has carried into July. So you think about our second half we’re factoring in that continued slow consumer business. That said, if you think about us longer term, unlike our position, apparel obviously is a discretionary but there’s different levels of discretionary and I think we play in a really good place there with our basics business. We’ve got a great brand portfolio, good innovation pipeline going. So, I think we can operate in this environment very well and I think we’re positioned well to do it. We talked about back-to-school for a minute, it’s still early, but consumer demand seems to be week over week improving a little bit and we’re encouraged by that and that’s across the innerwear business, across our D2C business, tax free weekend in 11 of the 17 states with last week and we saw a strong response for our business. So we kind of know when consumers are buying and what the headwinds are, but we are very encouraged to see what happens there. We’ve a strong program for back-to-school this year with more display, more inventory on the floor than we’ve had in the past. So we feel good about our execution behind back-to-school, and we’re starting to see a little bit of improvement in the consumer in a week over-week basis, but those headwinds definitely still remain.

Michael P. Dastugue — Chief Financial Officer

Yeah, I think with regard to costs, the inflation in the second half as the one, I think you can see that in our inventory number, right, as we called out that over half of our inventory increase is related to inflation. So in terms of if we’re looking at costs in our guidance, it’s unchanged really from the guidance we gave you guys at the beginning of the second quarter and so in terms of the costs are locked in for the most part for this year. In some cases, into early next year. As we think about next year, as you can appreciate, we’re not really giving guidance. It’s great to see cotton prices come back to a more normalized level. And I think that we’ll be looking at that as we start thinking about next year’s plans and pricing et cetera. So, but right now it’s, at this point, I think we feel like we have our arms around cost.

Susan Anderson — B. Riley FBR — Analyst

Great, thanks so much. Good luck for the rest of the year.

Operator

Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is now open.

William Gardner — Wells Fargo — Analyst

Hey guys, it’s Will Gardner on for Ike. Can you guys just touch on Walmart and Target obviously had those big announcements. Can you just maybe talk about how that impacted you in the quarter and if you’re going to see any impact from that into the back half?

Stephen B. Bratspies — Chief Executive Officer, Director

Hi, good morning Will. So I’m not going to talk directly about Walmart, Target any of our customers. What I would tell you is, I think you’re seeing a macro environment change in the second quarter and particularly towards the middle to end of the quarter with the inflation really hitting the consumer and you saw an inflection point in the consumer behavior. And I think that’s pretty consistent across retail channel, across different– different manufacturers, just consumer is in general. So I think it really depends on the consumer and where the consumer go and how is the consumer response to the challenging headwinds that they’re facing right now.

William Gardner — Wells Fargo — Analyst

Got you. And maybe just one more follow-up. You noted some softer than expected EPS trends in innerwear — got you. And maybe just one more follow-up. You noted some softer than expected PS strength in innerwear, does that mean you guys are losing share of shelf space and you’re seeing a migration of consumers to trading down to more private label?

Stephen B. Bratspies — Chief Executive Officer, Director

Yeah. So a couple of things that may be impact that a little bit. We’re gaining shelf space and I was very pleased with the quarter shelf space report that I got and sitting with the team and talking about the actions that they’re taking in the marketplace, a lot of that’s new product that we talked about in the prerecorded remarks. Our new product is resonating extremely well. So we’re gaining incremental product– incremental shelf space and we expect that to continue going forward as the pipeline continues to build. When you look at share, a lot of ups and downs in the business. Our share in Q2 compared to pre-pandemic were up 60 basis points. So, I try to look at share over — over time, it gets a little choppy quarter to quarter, but if you look at drive at trend-line over time, I like our share position. And the reality is private label of innerwear is not really gaining share. So that’s not where share is flowing right now. So, the consumer will net that out over time, but what we’re doing is, we’re leaning it and we’re not going to let the challenging macro headwinds slow us down. So we talked about the innovation pipeline space gains that we just referred to. We’re going to be aggressive in this time, whether that’s managing our inventory, whether that’s leading you as building behind our brands, we’re going to keep pushing and keep growing.

William Gardner — Wells Fargo — Analyst

Great, thanks. I’ll pass it on.

Operator

Our next question comes from the line of Jim Duffy with Stifel. Your line is now open.

James Duffy — Stifel Nicolaus — Analyst

Thank you. Good morning, Stephen, I wanted to ask about incremental, I believe, 30% reduction in SKUs; to be clearis this incremental to actions already underway. Where do you see the opportunity. Can you speak to a working capital benefit and how does that dovetail with the innovation agenda?

Stephen B. Bratspies — Chief Executive Officer, Director

Hey, good morning Jim. So we’re talking about that reduction inventory. So we did 35% last year and I set the target for the team this year for another 30% and I think I should do anything and may continue beyond that we’ll see how that nets out. I believe SKU reduction is obviously important for working capital for management. It helps our innovation pipeline, we talked about a lot of the new things that are coming. Fundamentally, we have to create space for that, both at the retail shelf and inside our pipeline and how we operate going forward. We have not historically been as disciplined as we need to be on SKU management and we have a long tail that I think can be cleaned up and will help us significantly in terms of –in terms of our operations and continues to build that lifeline for free innovation and it also improves our service levels. We talked a little bit about the beginning of the quarter. Our service level is not as good as we want them to be. They’re improving already in the third quarter and I’m encouraged by that. But service levels is a really important metric for us and SKU management, SKU rationalization is a big enabler for us to continue to improve service levels for us to grow.

James Duffy — Stifel Nicolaus — Analyst

Understood. And then I had a question on margins. Susan asked the question on commodity costs. But I’m curious as it relates to the back half of the year is their utilization deleverage and manufacturing that we should consider as a comparison and I’m hoping you can itemize the impact of inventory clearance on the margin outlook?

Michael P. Dastugue — Chief Financial Officer

Yeah. Hey Jim. This is Michael, good question. Yeah. As you think about the back half guidance; we did, we took sales down and we also took profit down, some of the profit relates clearly to just bringing down the sales. Some of it is to the point you made, which is in our manufacturing. We will be under-utilizing some of our fixed cost and so we’re taking that to the bottom line in the back half. And so that is a meaningful number, I cannot give you that number specifically, but it is something that will impact the back half profitability, but we think it’s the right thing to do. So in other words, as you think about the margin coming down in the back half, it is really not about additional markdown. It’s really about just not producing more inventory and as we talked about we’re planning to have less units at the end of the year than what we currently have, what we had at the end of last year. But total actions, they’re probably in the neighborhood of $30 million to $35 million. And so as we think about next year, right, you’ll be talking — you’ll be asking us about guidance next year. Those are things that would not be repeatable.

James Duffy — Stifel Nicolaus — Analyst

Understood, very helpful. Thank you.

Operator

Our next question comes from the line of Jay Sole with UBS. Your line is now open.

Jay Sole — UBS — Analyst

Great, thank you so much. I’m just wondering if you could maybe walk us through some of the details within the innerwear business, how the women’s intimate apparel business performed versus sort of the men’s, the men’s business?

Stephen B. Bratspies — Chief Executive Officer, Director

Yeah, good morning, Jay. So when you look at the Innerwear business overall, on a kind of a, we had a tough quarter, definitely inflation impacting it and Cyber event, all the things that we’ve talked about, when you break out the business. Not a dramatic difference between men’s and women’s; they’re performing pretty consistently. The innovation we’re balancing is pretty consistent across the business. The space gains that I referenced earlier, pretty consistent across the business. So not a dramatic change when you think back to challenging times in the past and how this business has performed, men’s business tends to hold up better than women’s business, there’s a lot of underlying purchasing behavior that goes into that, but to date we have not seen an inflection point between men’s and women’s.

Jay Sole — UBS — Analyst

Got it. Okay, Thank you so much.

Operator

Our next question comes from the line of Paul Kearney with Barclays. Your line is now open.

Paul Kearney — Barclays Capital — Analyst

Hi, everyone. Thanks for taking my questions. I was wondering if you can comment on wholesale inventory levels and where you think retailers are in rebalancing their inventories to right size for consumer demand. And then my second question is, can you talk about your planned price increases, kind of, in light of those inventory levels and are they going through ia expected and what has been the consumer response? Thanks.

Stephen B. Bratspies — Chief Executive Officer, Director

Sure. In terms of retail inventory yeah, there are pockets of inventories out there that obviously retailers have talked about their position, but I think what is important for us is a lot of our business is replenishment business, for– for them so a lot of what they’re calling out is more, I think more seasonal business. We have put that a slowdown into our second half and that’s part of our view because of retail headwinds and you think about why we put that second half guidance we put out there. We talked about the consumer and one of the things we talked about was the retail environment that’s out there, so we factor that into our guide. That said, if times continue to be difficult, I like our channel position, I like our channel mix about where we are and where we’re going to go and you asked the second question, I’m sorry, I don’t remember what it is.

Paul Kearney — Barclays Capital — Analyst

Just on your planned price increases. Can you just comment on how those, are those still going according to according to plan with your channel partners and what has been the consumer response? Thanks.

Stephen B. Bratspies — Chief Executive Officer, Director

Sure. Thank you. Yeah. So pricing, we talked about, we put innerwear into effect mid-first quarter. That’s pretty much played out the way we expected it to in the back half of this year and that’s the way, that’s globally around the globe, not just the US and that’s pretty much held true to form and then in the back half is when Champion start to hit the market in our fall-winter assortment, managed this through pretty well, team did a nice job, partnering with the retailers, consumer response has basically been in the range that we would have expected it to be and we are continuing to manage the business and think about the consumer, think about competition, think about price gaps, think about share, think about space gains that we have. All of that goes into how we would think about pricing going forward and we’re starting that step thinking about what’s next and how do we think about next year in our planning process.

Operator

Thank you. Our final question will come from Tom Nikic with Wedbush. Tom, your line is now open.

Tom Nikic — Wedbush Securities — Analyst

Hey, Good morning guys. Thanks for taking my question. Just from a modeling perspective, how do you think about the various, the different segments in the back half, how do you think about Innerwear versus Activewear versus International?

Michael P. Dastugue — Chief Financial Officer

So for Q3, we’ve got innerwear down high single-digits. We have act –Activewear basically improving the, give us one second, let me make sure we get the right number for you.

Tom Nikic — Wedbush Securities — Analyst

Okay. That’s alright.

Michael P. Dastugue — Chief Financial Officer

The Q3 is up high-single digits. And that’s part partially because we’re just rebounding up in terms of the shipments. The issues that Steve talked about and International is up low-double digits on a constant currency basis. But as we called out, we have a lot of currency challenges, so it will probably be flat on a reported basis.

Tom Nikic — Wedbush Securities — Analyst

Got it. Thank you.

Operator

That concludes today’s question-and-answer session. I’d like to turn the call back to T.C. Robillard for closing remarks.

T.C. Robillard — VP Investor Relations

Thanks. We’d like to thank everyone for attending our call today and we look forward to speaking with you soon. Have a great day.

Operator

[Operator Closing Remarks]